Some History and Consequences of a Tax Cut

1929

In the years since the Great Depression economists of all stripes have come to a consensus about what happened.   Wild speculation produced a crash.   That led to intense stress on the banking system.   The Federal Reserve (as primary villain) was unwilling and unable (because of the gold standard) to provide support.   So the banks failed, and the rest of the economy collapsed.  National income was down a massive 60% by 1932.

The collapse originated in the US and was much worse here than elsewhere. Germany, still paying World War I reparations, was a special case and fared badly.  It is important to remember that without the 1929 crash, Hitler would have remained a curious side-show.

Recovery in the US took a full decade.  There was a serious blip in 1937-38 when Roosevelt dialed back on stimulus and a GDP slowdown followed.  International trade dwindled in the 30’s, as many countries instituted protectionist barriers.   The US wasn’t fully out of the depression until the second World War.

 

2008

Fast forward to the crash of 2008.   The banking system was again central, because mortgage-backed securities brokers had become unregulated de facto banks.  (Why should businesses earn nothing on cash when mortgage-backed securities paid real interest and were rated “just as safe”?)  When the deteriorating economy led to large-scale mortgage defaults, the mortgage-backed securities collapsed in value and trillions of dollars of supposedly safely-banked assets disappeared.

People running things had fortunately learned the lessons of 1929, and stepped in immediately to keep the banking system afloat and pump money into the economy to prevent a depression.  That stopped things going from bad to worse—very painful but not a depression.

 

Crisis and Recovery

Even at the beginning, however, something strange happened in this country.   At the very end of his presidency, George Bush did the right thing  (for once) and in the face of disaster introduced legislation to keep the banks afloat.  Despite advice of economists, his own party refused to support him—claiming to fight socialism.  However 172 Democrats and 91 Republicans did support the bill, and by a 263 to 171 vote helped pull the country back from the brink.

The episode seemed odd at the time.  But with the start of the Obama presidency and the new Congress, it quickly became clear what had happened.   That had been a transitional moment.  The old Republican party that at least cared (conservatively!) about the well-being of the country was no more.

The new Republican party, more and more a creature of the Koch machine, had only one goal—cutting taxes on the small group of ultra-rich backers who now owned the party.   That translated immediately to a surprising position.   Mitch McConnell (always quick to know which way the wind was blowing) later summarized it as “The single most important thing we want to achieve is for President Obama to be a one-term president.”  Private statements of position were even stronger. There would be no cooperation on anything—even on recovery from the recession.  Obama wouldn’t give them the tax cut, so it was scorched earth.  Republicans at the time trotted out ideological objections to stimulus—which the current Republican enthusiasm for both presents and deficits shows up for the hypocrisy it was.   Everything that kept the country going had to be passed over Republican opposition.

Even with a Democratic majority, that limited what could be done as stimulus.   At the same time the Kochs founded and funded the Tea Party as an apparently populist, anti-spending front group.  Slow growth plus anti-establishment rhetoric plus an unprecedented dose of Koch money (enabled by Citizens United) helped Republicans gain control of the House.  Keeping the country poorer was a rousing success!

After Obama was reelected Republicans doubled down on slowing the recovery and preserving the remaining pain.  Their ploy was a commitment to balanced-budgets (today of course demonstrated to be bogus), including even a proposal for a constitutional amendment.  On that basis they deliberately blocked any further stimulus or social programs (such as Obama’s State of the Union proposals for community colleges and daycare)—starving government to sow discontent for the election.   By 2016 they had held the country hostage to their tax cuts for the full six years they controlled Congress.

Trump wasn’t their chosen candidate—too much of a loose cannon—but he would do.   He was an even better populist front than the Tea Party.  He didn’t even notice the irony in his “slowest recovery” claims.  Pence was their guy all the way, and Trump picked a cabinet full of other Koch people.  On tax cuts there was no problem managing Trump.   He already believed anything good for himself was good for the country.  The tax cut plan is now here.   It is worth more than $1B for Trump himself, and is everything the rich donors could have hoped for.

You have to hand it to the Koch machine.  All the distributed power in the power in the American political system has now been centralized and controlled.  Local, state, Congress, the Presidency, the Supreme Court—the Koch organization has money in all of it.   More to spend than the Republican party itself, and all under strict control.  A few hundred fabulously wealthy people are running the USA for their benefit.

 

Now

That’s where we are.

For the tax cut, what’s on the table is an astonishing giveaway of the country to the richest few.   The asserted benefits to the middle class are nothing but after-the-fact propaganda.  There is no logical or historical justification for claiming that upper class tax cuts produce jobs.   Business tax cuts, while they sound good, are actually no better.   Businesses hire people because of opportunities, not cash on hand.  With today’s low interest rates the cost of capital is not a big barrier to new opportunities, so tax cuts will end up going to the investors.

This is not really a stimulus package, and it’s a myopic approach to our real problems in any case.  One reason the recovery hasn’t helped everyone is that the Republicans’ past financial lock-down has prevented whole categories of problems from being addressed.  The economy is changing and issues such as skills mismatch, automation, educational opportunity and even infrastructure aren’t addressed just by throwing money at the private sector.

There’s another problem too.   All that tax cut money will now be chasing investment—a dangerous invitation to speculation.   And we’re incurring new large deficits to pay for it at the wrong time in the business cycle.  The country is out of recession, and large deficits in good times are bad.   When our speculative bubble comes to an end, it will be all the harder to find the stimulus money to get up off the floor.

There is also a real question about who’s going to be around to help.  Remember the disastrous Federal Reserve behavior in 1929 and the unanimity it took to get back from 2008.   Janet Yellen may not be retained as Federal Reserve Chairman when her term expires next February.  One prominent candidate to replace her has no specialist background in economics and opposed all stimulus after 2008 out of an unsubstantiated fear of inflation.   Trump has not chosen his nominee, but it’s something to worry about.

Too many pieces from 1929 are coming back together. The ultra-rich are getting their tax cuts.   By all evidence there is little interest in learning from the past and even less in looking out for the lot of the rest of us.

This is it!

This is it!  Finally it’s here.

After six years of holding the country hostage (no question now about the meaning of “party of no”)—

After thousands of Fox News stories full of arrogant and nasty liberals—

After untold campaign contributions—

We finally have what we’ve waited for.   The dearly-bought gift—the tax cut, our tax cut has arrived in Congress!

 

Think about what we’ve done to get here.  First some of the ground work:

– Republican Supreme Court justices Roberts, Thomas, Alito, Gorsuch.

– Citizen’s United—liberating our money as protected free speech.

– The unprecedented Koch organization—funded by billionaires and with a staff of 1600 and billion-dollar budgets to control state and federal legislatures.

– A full complement of Koch people (e.g. Pence, Pruitt) in Trump’s government.

 

Then our messaging with Fox News and Rupert Murdoch leading the way:

– First one fabulous job of divide and conquer.  We’ve made “liberals” even more detestable than “welfare queens”.   What a line we’ve got: “They’re laughing at us and think we’re stupid.   They’re stealing our jobs and our money.  Can’t believe a word they say.  Our team will bash their heads in when we win!”  We’ve even got real liberals apologizing for our stereotypes!  And then there’s racism…

– Next the subtler part—governments can do nothing, everything they offer is either worthless or for someone else.  There’s quite a list of things governments can’t do:  education, social services, medical care, even police (we just need “good people with guns”).  Funny thing about all those wastes of taxpayer money—they’re things we’re already doing for ourselves.

– Finally a bit of warm and fuzzy nonsense.  Jobs are gifts from corporations and rich people.   Make us rich and we’ll take care of you!

Sounds like a tax plan.

 

And look now at what we’ve got.  Let’s count the tax cuts:

– Estate tax.  Only helps families with at least $10 M to pass on.  Worth $1 B for Trump himself.   Just for us.

– Tax rates.  The top bracket is down to 35%, but that’s just the beginning.  We’ll really get 25% with the new passthrough loophole (our lawyers will certainly take care of any fine print).

– Corporate tax rates.   We’ve got the clout to get most of this as dividends or stock repurchases.

– Deficits.   That’s a particularly good one.   Those nonsensical growth predictions are just one more piece of the pie.  The deficits will mean cuts in services and correspondingly lower taxes going forward!

It’s actually marvelous how this has worked out.   We’ve got a tax cut before there’s even a budget!  Exactly the way the world should be.

 

Where is all this going?  Funny you should ask.   There’s an article in today’s NY Times talking about it.   It seems Mexico is actually doing something right.   They’re not wasting money on parasites.   People like us live in walled communities with their own security and service.  Some of it they pay for, and the state does the rest. And they pay practically no taxes!  The world as God created it!

 

The tax cut has come.   We are saved.

Private Sector Fantasies

This note is about a subject with perhaps more deliberately-sown confusion than any other:  the role of government in a market economy.

We start with the saint of free markets Adam Smith.   Adam Smith had no delusions that the free market system would somehow manage itself.   He saw three roles for government in a market economy:  defense, justice, and education.  Further he understood that the private sector and the free market were not the same thing—one of the roles of justice was to prevent the private sector from creating monopolies and thus perverting the free market.  In other words even as an ideal, the free market was neither self -policing (it needed to be protected against its own tendency to create abuses) nor self-sustaining (it needed government to create the population of educated workers).

With that as introduction, we want to talk more about the relations of business and government.  There are three sections.  The first two expand on policing and sustaining of the free market, as just discussed.  The third talks about scope—what objectives for society are in or out of scope for the free market. The Trump administration has positioned itself as the defender of free markets against government.  Instead they are defenders of something rather different, with real dangers as a result.

 

Policing the free market

Monopolies are bad.  they raise prices and stifle progress.  They are also by many measures growing in power.  But they are not the only area where the free market needs to be protected from itself.   For example, lack of business transparency perverts the capital markets, so the SEC plays a crucial role.

A more complicated but equally crucial role is regulation of the boom and bust cycles (with bank failures and human misery) that used to be endemic to capitalism.  Government has two responsibilities for controlling those cycles:

  1. It needs to act “countercyclically”. Despite the jargon term, this is so basic as to be biblical—save in good times to prepare for bad. In a recession the government is the only party able to stop the spiral of low sales -> layoffs -> even lower sales-> even more layoffs.  It does that by injecting money into the economy to stabilize sales.  But in a recession, tax revenues are down, and the money has to come from somewhere–preferably savings but if necessary debt.  In 2008 George W. Bush had just fought an off-budget 2 trillion-dollar war, so the cupboard was bare.  Republicans screamed about increasing the deficit, even proposing constitutional amendments for balanced budgets.  Their line “real people tighten their belts when they have to” was a deliberate misrepresentation.  Real people save for bad times; otherwise they have to borrow to put food on the table.
  2. Government needs to recognize and control the excesses that can creep in to cause havoc in the business cycle. While many factors contributed to the 2008 crash, the most spectacularly deadly was the perversion of the banking system caused by mortgage-backed securities. In the giddiness of deregulation no one was looking.  The aftermath produced the Dodd-Frank legislation as an antidote.

Finally, as a last example, there are categories of risk where you can’t count on the business decision-making process to do the job.  Low-probability/high costs events (plane crashes, oil rig blow-outs) should in theory be prevented by rational decision-making, but in practice it’s hard to refrain from increasing profits by ignoring something that “really isn’t going to happen”.  So there is a role for government there too—protecting both the public and the businesses.

Current status:

– The administration’s anti-trust position remains to be seen.  Trump campaigned against mergers, but appointed an industry-representing trust lawyer to head the anti-trust division.

– There seems to be no recognition of business cycle issues.  Trump’s tax plan runs a big deficit to stimulate an economy close to full employment.  This runs the risk of repeating 2008 with an even worse debt position to fight it.  He also wants to repeal Dodd-Frank and says he won’t enforce it now.

– The general rule is that any regulation opposed by any business is bad.

=>  There is no serious recognition that the financial system needs policing.  Trump runs the show based on what he has wanted to see for his own businesses.  This is a blind dash into another 2008 or worse.

 

Sustaining the free market

Adam Smith pointed out the need for government to supply a suitably-trained workforce.   In the eighteenth century that meant simply literacy.   The definition of suitably-trained has changed over time.  By 1940 a then astounding 50% of American students finished high school.  In that era no other country approached that level of broad education support.   Then the GI bill made college possible for veterans, and public colleges expanded widely throughout the 1960’s and 70’s.  This coincided with unquestioned American economic dominance.  An educated workforce (at all levels) remains a critical national requirement.

You can take that one step farther.  Equality of opportunity is usually discussed in terms of social effects, but there is a corresponding benefit to the free market.   Business and the market benefit when all persons are able to achieve up to their capabilities.  The United States used to lead the world in upward mobility, but with rising inequality it now ranks behind most developed countries.

There is one more government role that fits here as well, namely research.  Government support of research produces people to be hired by cutting-edge businesses, and also supports the creation of new businesses to exploit the progress of science and technology.

Current status:

– For college, the student debt crisis speaks for itself.  A whole generation of students can’t imagine when they will be able to get out of debt.  This is compounded by De Vos’ support of shady lenders and weakening of controls on fraudulent educational institutions.

– For K- 12 education, states have retreated in funding, and De Vos is proposing a voucher system that will abandon the broader population.  Vouchers will be fixed in dollar value, to be augmented by surcharges at the now-privatized schools.   If you want a good education you pay for it; if you can’t, there is no guarantee of what you get.  This is institutionalized separate and unequal.

– Trump’s budget essentially abandons the government’s role in research, and his appointees have attempted to minimize the role of science.

=> There is surprisingly little recognition that government has an important role here at all–except to privatize it!

 

Scope of the free market

Adam Smith felt that the private sector could not be trusted even to defend free markets.  So it is not surprising that there are other aspects of society that need defending as well.

We give a few examples:

– Well-being of workers.   Smith describes effects of supply and demand on workers, and he even points out that adequately-paid workers may be more productive, but he makes no claim of utopia from the free market.   In fact in Smith’s description, workers’ welfare depends on a market for labor in which individuals have little bargaining power.

– Resources and the environment

Enterprises will use the environment for their own benefit, unless there are rules to the contrary.

– Infrastructure

Public resources such as roads, bridge, airports, internet, etc. should be built and maintained as needed by everyone.

Current status:

– Trump has pushed to limit OSHA workrules, opposes unions, and has no plans to raise the minimum wage.

– The EPA is being severely cut and redirected to helping businesses.

– The stated approach to infrastructure is via private investment, which will go where the money is.

=> There is no recognition that areas such as these can be out of scope for the private sector.  Instead there is a blind belief that growth solves everything.

 

From this summary it should be clear how far we are from free market economics.

The current national policy is that the private sector just needs to be encouraged to go do its thing.   We don’t have to care about policing its risk, we can let it take care of education and research, and nothing other than its success is needed to solve every other problem in society.  Just make sure it’s flush with cash and let it go.

That was the history of the nineteenth century, and for vast part of the population it was no picnic.  And it is worth remembering that 1929 really did happen.

Even thinking of the more recent past there’s an eerie familiarity about our situation.  We have a supremely confident lunatic fringe with the power to run amok.  The last lunatic fringe to take control of our government (remember the neocons?) gave us the Iraq war—which destabilized the Middle East and bankrupted the country—and the crash of 2008.

This time it could well be worse.

No Plan

The latest Republican healthcare proposal is such a horror, it is hard to think about anything else.   There is in fact no plan—just a scheme that gives money to the states for them to figure it out.  It is underfunded (the non-participants in Medicaid expansion are now covered too but with overall less money); there is no longer any guarantee of a minimal level of coverage (including for pre-existing conditions); and in the longer term it shuts the door on Medicaid entirely.  It increases the complexity and uncertainty of the system to such a degree even the insurance companies are upset—and it’s not just their problem.   We’re talking about small, more expensive risk pools and significantly greater administrative costs.

Since this level of incompetence is just about unthinkable, one asks how anyone could come up with it.  There are three immediate answers—all bad:  Trump’s pledge to get rid of Obamacare, the proposal’s massive shift of funding from blue states to red, and the simple fact that this is the last chance to pass something before the special 50-vote rule expires September 30.

Let’s focus on the first point—what did Trump voters think they were voting for?   They were told he had a much better, cheaper plan.   After all he was a businessman and great negotiator.  Since the current proposal is no plan, we now know beyond all doubt that what Trump sold was a lie.  That fact by itself is an under-reported outrage.

We need to explore the scope of that outrage.

It’s not just Trump.  The Republicans have been repealing Obamacare for six years.   They clearly never had a plan either, just lies.

It’s not just healthcare. What do Republicans want for the country?

That actually has straightforward answer.  It is slightly different for Trump and the Congress:

– For Trump it is simple:  “What’s good for me is what’s good for the country.”

– For the Congress the target extends only a little wider:  reduce taxes for very rich people.   Based on contributions this is the Koch brothers’ Congress.   The Koch’s political organization (not just their own money) employs 1600 people and has a larger budget than the Republican party itself.  They are the dog wagging the Republican party tail.

What’s the plan for jobs—reduce on taxes on the rich (with no serious look at whether that addresses real problems)

What’s the plan for infrastructure—reduce taxes on the rich (private financing takes infrastructure off the budget and assures spending will go where the money is)

What’s the plan for healthcare—reduce taxes on the rich here too (defund medicaid & push other care to the states with declining funding)

That is the plan.  There is no plan.  Just lies.

Living with the Dark Side

There has been a lot of talk recently about possible Democratic cooperation with Trump.   There is of course little basis to that yet, but it is interesting how quickly we’ve gone from hoping the Republican Party would save us from Trump to the other way around!  With that as motivation it is worth thinking a little more about the players and issues in this game.

First about the choice of evils:

On one hand we have the Republican Party:

– This has become largely a Koch brothers organization.  Low taxes for the very rich is the only real objective.

– Opposed to all social programs (no accident they couldn’t do healthcare).

– Pro-business, but perhaps not completely nuts on economic issues.

– Can find individuals to work with.

On the other hand we have Trump, with two sometimes contradictory impulses:

  1.  Sees everything as though he were still managing his own businesses

– Cut taxes on businesses and rich people

– No interest in unemployed people or other “losers”

– All regulations are bad; anything of value happens in the private sector

  1.  Sold himself as a “populist” and wants to believe he is delivering on it

– Primary focus is jobs via tax cuts and tariffs.  Not much has actually happened.

– Support for coal miners, abandonment of Paris Agreement, killing DACA

– Not much else yet; AHCA would not have been a winner

The business side of Trump is only subtly different from the Koch brothers agenda, and separating Trump’s two sides is tricky.  His speech on exiting the Paris Agreements was all about the populist side, but everything behind it was driven by Koch brothers people (Pruitt, Pence).  Similarly, AHCA was nominally populist, but really an excuse to cut taxes for rich people.

Thus far Trump hasn’t done much for the populist side, but he keeps talking about it.   That’s actually what has thus far stopped healthcare.  Republicans spent six years repealing ACA with no worries about who would lose coverage–but that became an obvious issue now.  Even though Trump supports AHCA, it’s not so easy for Congress just to laugh off the coverage.

Ideally that is an opening to find Democratic proposals of obvious benefit to Trump’s core constituency that are somehow salable to Trump.  We have to accept these will only get mileage if they are presented as Trump’s initiatives.  If it all fails, that will at least point out the hypocrisy of the populism.

There are some obvious possibilities:

  1. Healthcare

Anything here is conditional on Republicans really giving up on the AHCA nightmare. If that happens Trump will need something.  That could conceivably be whatever comes out of the bipartisan work on ACA, but Trump may want something really different to put his name on.

It should be pointed that this is not just an issue for the Trump core.  Business needs it too, even more than the tax cut if you if you believe Warren Buffett.  A good solution here could incorporate elements of a single payer system into a public option based on Medicare.  For that it is important to realize that the existing Medicare infrastructure is actually administrated by the private sector.

This is a low probability, but you never know–he might bite if it really does save money for business.

  1. Infrastructure

Trump has said he wants to do this, but a pure private sector approach won’t work for poor areas.  Appalachia is not going to benefit without some kind of compromise approach.

  1. Transitional job assistance (retraining and support)

Thus far Trump has put all his eggs in the “growth = jobs” basket.  His target budget killed any assistance programs, including a successful one in Appalachia.   However, it is now clear things are going to take longer than he expected.  If this is viewed as transitional, we may actually be able to help people.

  1. Early childhood education; cost of college

All polls I’ve seen of Trump’s base say that they want something better for their children.  Paul Ryan Republicans have been disastrous for such programs.  These would be clear benefits for the working class.

  1. Tax reform

Trump likes to talk about reducing the current 35% corporate income tax.   However, the average effective rate is more like 24 %, in large part because of special provisions delivered by lobbyists for particular corporations.  A lot of Trump support is from small businesses who aren’t so lucky.   A fair system may not appeal to Paul Ryan, but there is more reason for it to appeal to Trump.   No one is supporting 15%, but 25% with real tax reform would not break the bank and would recall an achievement under Reagan.

  1. Promoting American jobs

Trump has made high tariffs the miracle solution to all problems for everyone.   That’s not true, but it doesn’t mean there is nothing sensible to do.   Trump probably doesn’t know anything else.   We may be able to help.  This is not the Republicans’ area of expertise.

  1. Climate Change

This is so crazy it’s hard to give up, even if it means fighting the Koch brothers directly. There’s both a carrot and a stick involved here, with recent developments for both:

– Harvey is the most recent example of what worsening weather can mean.  As noted in the previous post, no reasonable business faced with such a large potential risk would choose just to ignore it.

– The reality of climate change will create enormous business opportunities—wholesale migration to electric cars is just one.  With current policies we could very well cede all that to the Chinese.  This would not be the only time that a first mover like Tesla would lose out in the end.

In all these areas, in contrast to the Republican healthcare fiasco, Democrats should be able to offer real proposals.  So you never know….

The Phony Issue of Globalization

Globalization as a phenomenon is irrefutable.   The world continues to become more interconnected by any measure you can think of.  National economies are so interdependent that it’s hard to untangle the threads.

Globalization as an issue is something else.   There is a long list of globalization problems:  it picks winners and losers economically, it makes some people feel like the country has changed out from under them, it destroys the sense of community.

The trouble is that globalization is responsible for essentially none of that.  Our real problem with globalization is how much we can blame on it.

Let’s start with jobs.  We begin with a frequently-cited quote from Harvard economist Lawrence Katz on automation versus globalization for jobs:  “Over the long haul, clearly automation’s been much more important–it’s not even close.”  That gets us part of the way there.  It’s not primarily globalization.  As many studies have shown, Trump’s core supporters lost their good union jobs for many reasons, not just globalization.

However, that’s history.   What matters is now, and the jobs story gets more lopsided all the time.  For today, one can say unequivocally that no set of tariffs is going to bring back those good union jobs.   And the future looks worse.  Self-driving cars and machine translation are key indicators of where things are going.   One article about Artificial Intelligence puts it this way: “the A.I. products that now exist are improving faster than most people realize and promise to radically transform our world, not always for the better …  they will reshape what work means and how wealth is created, leading to unprecedented economic inequalities and even altering the global balance of power.”

There is a growing jobs problem, and it’s not globalization.  We’re moving ever faster into a two-tiered society with participants and (increasingly many) non-participants in the technology-driven economy.  But we would rather futz around with NAFTA, because apparently that plays better.   By continuing to blame globalization as the jobs problem, we end up doing crazy things.  We’re actually skimping on education and research!  One thing we really can do for Trump’s core is make sure their kids have futures, but we’re not even trying.  Instead we’ve got a budget plan that vilifies the unemployed without any notion of what jobs are waiting for them.

That’s jobs.  What about alienation, feeling the country has been overrun with immigrants?  Is that really globalization?  There’s a key to that one too:  no one is talking about Swedes and Germans.   It’s Mexicans and—whether we want to admit it or not—blacks.  Just about any study of the last election talks about the importance of race.   “Immigrants” is a keyword; race was always part of it.  Violence after the election was immediately directed against blacks.  With Obama as President, the Republican party has been deliberately stoking racism for years.  Trump just whipped it up into something more obviously ugly.  Globalization is a smoke screen for deliberately-provoked racial hatred.

How about community?  We now have a whole media wing promoting the idea that cultures can’t mix:  Trump’s Mexican rapists and Bannon’s calls for holy war are just starters.  We’ve always had that sort of stuff in this country (Jews, Italians, Irish…), but we’ve always emerged better for what had been vilified.  Human beings have a built-in fear of strangers.   As they get to know each other they tend to get along.   But they can be whipped into a frenzy by demagogues who choose to exploit that fear for their own advantage.  Trump is certainly not the first to ride scapegoating to power.   Globalization is a convenient bogey man.

So globalization itself is not the issue.  What we really have in this country (and elsewhere)  is demagoguery–self-serving lies under the flag of fighting globalization. And the lies are damaging, as they undermine both national competitiveness and individual well-being.

There are no simple solutions, particularly now that so much has entered the legitimized mainstream.  But there is still a good use for “globalization”–the next time you hear that that disadvantaged workers need the government to fight globalization, you know exactly who’s looking to win!

The President of China

There has been a lot of talk recently about China’s growing presence on the world stage and how the US as predominant power should react to it.  With that in mind we go to China, just outside the Forbidden City, where the Chinese are planning their strategy…

Xi Jinping: There are many factors we need to consider, economic and political.  Today we are an economic servant to the West, building their iPhones and other toys.  We need to learn to take their place.

Planner: The Americans have many advantages.  They have excellent universities and their pick of talent from all over the world.  They have an interlocking system of university, government, and private research labs.  It’s hard enough to catch up, much less to lead.

Xi: We have to go step by step.  I’ve heard that many of their new companies are led by foreigners.  We can cut into that and certainly lure our own people home–a little xenophobia would help.   As for education and research, we know that government money is critical both in government labs and in the universities.  We have to find a way to slow down that money and then duplicate their system here.

Planner: Sounds like a lot of work, but we’ll start on it.  They’ve been working for decades to get where they are.

Xi: We need to get more specific now.  What are the lead technologies we can use to establish our dominance?

Planner: It’s hard to answer that question.  Software is always there; the particular new twist seems to be Artifical Intelligence.  That ties in with robotics.  Biotech.  Probably the biggest thing is energy–climate change means the whole world will have to convert.

Xi: The Americans are big players in all of those, but progress is very international.  If we can get them to isolate their people we can win.  Energy is too big–we need to limit their role.

Planner: They were a driving force behind the Paris Climate Agreement.  Maybe we can sabotage that.

Xi: Great.  Good first step!

Xi: The next subject is politics.  The Americans have been leading the so-called ‘free world’ forever.  Everybody works with them; no country wants to be left out.  All major international agreements of any kind go through them.  They’ve done very well that way–they are the richest, most dominant country in the world.  Our economy is tiny compared to theirs–how can we match their influence?

Planner: The only way I can think of is to get them just to quit. Get out of our way so we can take over.

Xi: I don’t understand.

Planner: It seems that over the years the Americans have come to believe their own propaganda–that all of their international agreements and institutions were setup out of pure beneficence!  Nothing to do with remaining the richest, most dominant country in the world.  They even think that about foreign aid.

Xi: You’ve got to be kidding.  No one else thinks that.

Planner: All we’ve got to do is push them over the brink:  No international institutions, no foreign aid–all unaffordable charity and a foreign plot.

Xi: You really think you can pull that off??

Planner: Well, just a minute.  We need some kind of slogan.  Something catchy…

Planner: I’ve got it!!  AMERICA FIRST.

Xi: Welcome to the Chinese Century.

 

This is the Richest Country in the World

The title of this piece is a fact.  By itself the statement is not controversial, but it shows the deliberate misinformation we’re surrounded by every day.

There is a good example from Trump’s speech exiting the Paris Accords: “cash-strapped cities cannot hire enough police officers or fix vile infrastructure.”  The statement is perfectly true, and there is a reason why that statement is true for the richest country in the world.   It is that Trump himself and people like him have taken more and more of that wealth for themselves–and out of the public sector.

For the past six years the Republican Congress has blocked essentially all new expenditures for the public good.  And Trump’s proposed budget will make that a full-scale assault on states and cities.   He is both reducing current aid and also pushing more and more responsibilities for services their way.  The story also includes the Republican-led scandal of education, where reduced state government support for education since the 2008 crisis has contributed to a whole generation trapped with student debt.  (In Trump’s budget the coming DeVos nightmare is its own story–since there is no guarantee what will be paid for by voucher, good education will be sold to the bidder in the brave new world.)

This is the richest country in the world, but the fact that many people don’t feel it doesn’t mean there is no money.   The money has been taken out of the system for the benefit of people like Trump, and they are now proposing to take more of it.

Trump says he is preparing an economic nirvana, where all those who are currently left out will be saved.  More on that pipe dream in a minute, but focus on the explicit reality first:  upper-income tax payers like Trump will make trillions of dollars on it.   There is even a brand new big “pass-through” loophole for rich tax payers like Trump personally. There will be scant benefit for the middle class, and even that may be eaten up by the added costs imposed on the states.  The poor will be slammed on all fronts.

As to the nirvana:

  1. The economy is close to full employment in the sense that good new jobs require specific skills, so most of the current unemployment is structural—due to skill mismatch, not the level of economic activity.  Job training programs are actually cut in Trump’s budget.
  2. Few economists believe that anything close to Trump’s proclaimed 3-4 % growth is going to happen, or even that such growth would prevent a deficit. The deficit itself is inflationary, and would ultimately cause job loss rather than growth.
  3. Stimulus deficit spending at this stage in the business cycle is so foolhardy, that no previous President–Republican or Democrat–has ever wanted to do it. At the very least it invites inflation and the possibility of another 2008-like crash.

This is not Trump’s “genius” at work, it is something far simpler.   Trump believes what he is says, because he is still Trump the salesman looking out for himself:  taxes are bad, regulations are bad, unions are bad, minimum wage is bad, research is a waste.  As a salesman Trump has always had a particular gift for believing what he sells.   And what he is selling is simple:

“What’s good for me is what’s good for the country.   Stop bothering my companies and cut my taxes and everything will be just great. “

There is nothing else here but that.

As the saying goes: if you want to know what is going on–follow the money.  And it is clear where it is going in the richest country in the world.

What the Paris Accords Decision Tells Us

This note is not specifically about climate change.   It is about Trump’s decision to abandon the Paris Accords and his speech to defend it.   Even after all that had come before it, the Paris Accords decision was a watershed.   The picture is stark.

  1. Trump feels no responsibility for the ultimate consequences of his decisions.

As we noted before, Trump’s speech never even raises questions about the significance of climate change.   He doesn’t bother to dispute it.   Instead everything in that speech is about deliveries to his targeted constituencies.  This is the Mafia Don who has eliminated the opposition and is out to provide spoils to his supporters.   (It is relevant that Trump’s supporters have caught that message—a  NY Times reporter quotes them asking when the “winning” will start.)  There is no other layer of concerns.

This is not just a matter for climate change, important as that is.   It is equally relevant for economic policy, where he is proposing huge deficit-supported stimulus to an economy near full employment while removing the safeguards added to prevent another 2008 crash.  And—with the constant discussion of military buildup but no specified objective—it is also relevant for the very real threat of war.

  1. Trump ignores all demonstrations or other inputs outside of his immediate circle.

The enormous outpouring of opinion on the subject of climate change and the Paris Accords is unacknowledged in Trump’s speech.  The speech didn’t even address the substance of the issues raised.  All we got was blatantly falsified economic statistics, a personal commitment to the coal industry, and a secret world-wide conspiracy again US competitiveness.

Trump’s belief in his own genius is such that other expertise or expressions of concern simply don’t exist.  Other Presidents of course have had advisors and inner circles, but most have recognized they are Presidents of the United States and have at least had an interest in what gets said.  With Trump we have the closed world of a dictator.   We on the outside have no way in.

  1. There is no check on Trump’s impulsiveness and self confidence

That is perhaps the most concerning of all.  It doesn’t bother Trump to go at cross purposes with the vast majority of reasoned opinion.   From his point of view that is courage, but there is a difference between courage and foolhardiness.  Courage is doing everything possible to understand the situation and taking a decision that may be unpopular.

Here we’re talking about “I’m a genius, everyone else is an idiot, so fuck them.”  That is what produced six major bankruptcies including the spectacular ones at Atlantic City.  There Trump built three big casinos as prevailing opinion was deciding the party was over—and they were right.  Trump is perfectly capable of leading this country and the world into predictable disaster without a second thought.  He has done it before—six times.  That is of course what is behind the whole Russian story—banks in the US wouldn’t deal with him anymore.

Trump himself has always moved on to the next project, leaving the investors and contractors to suffer.  But we have only one world and nowhere to hide.

Sacrifices to the Gods of Jobs

Since the election there has been a continuing focus on the “Trump core voters”–people whose standard of living plummeted after the loss of good unionized industrial jobs.

During the campaign Trump’s story was that the jobs were lost to unfair trade practices, and that the cures were tariffs, deportations of immigrants, and abandoning NAFTA.  In the months since Trump assumed office, his emphasis has shifted.  China is our friend, the NAFTA discussion is on hold, and all the stress is on prosperity to be created through a huge tax cut for the rich.

Few economists believed the first story (most put the emphasis on technology change), and even fewer believe the second.  All of that, however, makes it even more important to understand what is actually going on.

The message here is that the problems of the “Trump core” are not isolated, but emblematic of fundamental trends in American society.   And Trump’s currently-proposed cure is more a problem than a solution.

 

We begin by referencing a recent article which points out how the problems of the Trump core voters fit squarely within the context of the decline of the middle class.

There is in fact no mystery about what is going on.  US society has been changing in fundamental ways, and those changes include a number of separate trends:

– The Trump core voter issues

– Underfunding of education, including a huge rise in the cost of college

– Infrastructure decay

– Decline of the middle class

– Vast increase in wealth inequality by any measure

– The Tea Party and Donald Trump

Briefly stated, the country is losing the public infrastructure necessary to maintain the middle class.  That trend is fundamentally tied up with wealth inequality, and in fact there is feedback that is accelerating both the inequality and the middle class decline.  Part of the problem is familiar “trickle-down economics”—the historically false idea that giveaways to the rich produce jobs—but the current version of it has reached a stage where it threatens the country as we know it.

To see that we go through the items one-by-one:

  1. Trump core voter issues

In any analysis of the problems of Trump core voters, the interrelated factors of globalization, technological change, and deunionization all play a role.  Industry world-wide (even in China) has moved up the technology curve, and good jobs demand more education and skills.  Workers without such skills are at the bottom of the heap:  competing for scarce jobs with no leverage and without union support.

This is not the first time that the US has experienced such transitions—think of textiles in New England.   Such dislocations are hard and can take time.  It is the role of government to provide support, retraining, and incentives to reestablish the economic base.  Education in particular is critical, both for the job-seekers and perhaps even more for their children.  In the current environment there has been little money or appetite for any of that.

The Trump budget in fact cuts essentially all such support in favor of nothing but more “tickle-down”—cut taxes on the rich and everything will be great.

  1. Education

The problems with education, however, go beyond the Trump core voters.   In the current economy (as just discussed), education is the key for most people to join the middle class, and we are making that harder than ever.   Many states have cut back on education budgets across the board.

The most obvious example, though, is the huge rise in college debt coming from rising tuition even at public colleges.  Even though college is for most people a prerequisite to a good job, we are making that a tough gate to get through.  As a society we have effectively abandoned our commitment to free public education.  And if there is any single thing that is important in “making our country great” it is education.

  1. Infrastructure decay

Like education, this is an example of refusal to fund the public good.  In the Presidential campaign both Trump and Clinton raised infrastructure repairs as an issue.  Further, since infrastructure work is personnel intensive, it can be a means of dealing with the transition issues discussed for Trump voters.  However, really doing something means significant money must be spent.

Despite Trump’s pronouncements on the role of the private sector, there is no way to make this happen without government spending, and it remains to be seen if there is a will to do it.   (Trump’s budget has seed money for privatizing bridges and airports, but the program is far from clear.  There’s no guaranteeing what will get done, and the opportunities for corruption are very large.)

Moreover for the middle class, infrastructure isn’t limited to just roads and airports.   There are many factors, including such basics as healthcare and childcare, which have a role in the viability of the middle class.  There is currently little support for any of it.

  1. Decline of the middle class

The previous points described some of what has been lost for the middle class.   And statistics show the result.   It has become harder to get in (and even those that do can have crushing debt), and harder to stay in if anything goes wrong.  Far fewer people now think their children will make out better than they did.

We also have examples of pending Trump administration programs that will make matters worse.  Healthcare, judging from the House bill, will become more uncertain and expensive, particularly if you are elderly or have pre-existing conditions.   For education, DeVos has already made things worse for student debt, and her voucher program will deliver for a payoff for people who already have kids in private schools, but has no commitment to delivering quality education for all.

All told pretty grim.

  1. The role of inequality

To start with, it is important to recognize how drastically things have changed in this country—for example from 1980 to 2014 incomes of the top 1% have tripled in real dollars, but incomes of the bottom 50% were unchanged.  And the effect actually was more pronounced the higher up the ladder you go–the increases for the top .01% were significantly greater than for the top 1 %.

As usual more money buys more power, and we’ve now reached the stage where even individuals (super-rich ones like the Koch brothers, Robert Mercer, Betsy DeVos) can dictate public policy.   That effect was enhanced by the Citizen’s United decision, since they now have unlimited ability to affect elections.   Overall–more money drives legislation favorable to the elites, which in turn makes them ever richer and more powerful.

There have been two primary parts to their message:

– Opposition to government social welfare programs of any kind (“governments can do nothing”).

– Pressure for tax cuts for the wealthy (“we are the job creators”).

The first attacks low and middle class programs (even education)—which they don’t want to pay for.  (Robert Mercer, one of Trump’s primary backers, famously said that people on welfare are worth less than cats.)  The second drives increasing inequality—more and more wealth and power for the elites (i.e. Trump and his cabinet).

  1. The Tea Party and Donald Trump

Ordinary “trickle-down” economics has always offered a historically false promise—cut taxes on the rich, and things will get better.

With the Tea Party and Trump we seem to have gone one step further.  Great sums of money have gone into promoting the idea that since jobs come from the private sector, the only way to have jobs is to let the private sector do everything it wants.  Jobs are gifts from the “job creators.”  Getting more jobs means doing everything possible to keep the job creators happy.  Government can only get in the way.  The recipe for more jobs is tax cuts for the job creators (corporate and personal) and elimination of programs that might disturb them (or take money they might otherwise get).  We must keep up the sacrifices to the jealous gods of jobs.

That message runs counter to both logic and history.  Corporations don’t hire people because they are happy or grateful; that would be incompetent and bad business.   They hire based on growth opportunities and in locations that suit their purposes.  And government has a lot to say about conditions for growth and how people will actually benefit.  It is precisely the elements of the public good—education, infrastructure, research—that create the environment that makes for our success, both as a country and as individuals.  The economic successes of Silicon Valley and the current centers of biotech didn’t come from their being the cheapest and most docile places to do business. Historically, overall economic performance under Democratic administrations has actually been significantly better than for Republican ones by essentially all measures.

Nonetheless, the simplicity of the message has led to its overwhelming success.   It has become so powerful, that when it fails we only get more of the same.   We have now been through several cycles of:

Tax cuts for the rich and reduced funding for social programs =>

Reduced support for middle class people to succeed =>

Fewer people in good jobs =>

Even more tax cuts for the rich and cuts to programs

That is basically how we got from the Tea Party to Trump.  The Republican Congress tried desperately to repeal the Obamacare surtax and blocked all attempts at social welfare legislation—including initiatives for early childhood education and community college support.  That paid off with Trump elected on a spurious jobs platform that has translated in the budget to extreme tax cuts for the rich and even more drastic cuts to all services.

The “jobs are gifts” fiction has now reached the level of religious fervor:  we must be ready to sacrifice all (environment, education, minimum wage) to the corporate “job creators” so that they will grant us jobs.  Trump’s budget effectively does just that.

“jobs are gifts” is like quicksand—you can’t get out.  We can’t stop the decline of the middle class, because if we stop giving to the rich they’ll take our jobs away.  So we continue to spiral down to a two-tiered society with a growing gap and little in between.

As always with “trickle-down” economics, the sacrifices are real but the promises are not.  There is no cornucopia of good jobs coming to the “Trump voters” or others looking for middle class income without education or skills.  Nothing in Trump’s budget will fix mismatches of jobs and skills, but the tax cuts are real money.

In fact with the specifics of Trump’s tax plan, things look decidedly bleak.  With huge deficit spending at this stage of the business cycle we are inviting another crash on the order of 2008 or worse.  We survived 2008, because the people in charge knew enough to act countercyclically.   We won’t have that luxury this time, which is exactly what happened in 1929.

 

On the other hand if we can overcome the “jobs are gifts” fiction, the world suddenly looks brighter.  That’s not to say all the problems will go away, but at least we can systematically make things better.

First of all, it isn’t that hard to fix things.  The country is prosperous, but the prosperity has been accompanied by dramatic inequality.  We need to broaden prosperity by broadening opportunity, similar to what happened in the fifties and sixties.  History has shown that contrary to the “gift” fiction, broadened prosperity actually helps rather than hinders growth.  Education, research, and even (with global warming) the maligned EPA are keys to growth.

Second, despite all the penny-pinching gloom, we do have the resources to make it happen.  The straitjacket we’re in now is of our own doing.   There are many examples.

Republicans like to talk about the impending entitlements disaster:  Social Security and Medicare.  In fact neither is unmanageable.

Social Security is self-funded, but it is currently paying a portion of benefits out of past savings, and in 2034 that pot of past savings will be exhausted.   However what happens in 2034 has been much exaggerated–current funding would continue to pay 3/4 of benefits for the foreseeable future.   (“Social Security is bankrupt” is another trick of language, falsely implying there will be nothing after 2034.)  For the remaining 1/4, one first notes that the Social Security payroll tax has become increasingly regressive–the tax is paid only on the first $118,00 of income, and with the growing wage inequality a higher and higher percentage of earnings is outside the cap.  Doing away with the earnings cap is estimated to cover benefits for an additional 30 years—at which point no one knows what the demographics will look like.  That isn’t necessarily the best solution, but it shows that solving the problem is only a matter of will.

As for Medicare, the issue–rising medical costs–is the same problem faced by every developed country and every insurance company in the world.  There’s no way that problem isn’t solvable.

In fact with growing income inequality, the tax system has become more regressive overall, and it takes surprisingly little adjustment to save the middle class.

Current personal income tax tiering is simply out of whack with the magnitude of the incomes built up by growing inequality.  Also, despite the dire predictions of the “jobs as gifts” fiction, there is no evidence that taxing high end personal incomes costs jobs.  Obviously there are many things worth fixing in the tax code, but it doesn’t take high risk or rocket science to generate money to save the middle class.

As to getting there, you might (or might not) say:  the only thing we have to fear is fearmongering itself!  Unfortunately there is a lot of it:

– Citizen’s United—lets individuals put limitless money into politics (“Jobs are gifts!”, “Governments can do nothing!”)

– Limitations of the press—entertainment seems to win out over substance

– Demagogues and politics of identity—unfortunately always a danger in democracy

One can only hope that people will come to realize that “jobs are gifts” is just a trick, and that divisiveness and scapegoating are conscious techniques of some members of the .01% to divide and conquer the broader population.

We have to be very clear this is not anti-business.  Historically what works is to have government and business as countervailing forces that keep each other honest.   That’s what gave us prosperity in the past, and what is clearly (explicitly) out of kilter in the present.

The one good thing you can say about the present state of affairs is that perhaps it is the cathartic moment that lets people realize that the grim worldview is false, that they don’t have to be fighting with each other for shrinking crumbs from the elite, and that broader prosperity is not only possible, but actually doable.